A Radial Basis Function Scheme for Option Pricing in Exponential Lévy Models

Raymond Brummelhuis, Ron T. L. Chan
2013 Applied Mathematical Finance  
We use Radial Basis Function (RBF) interpolation to price options in exponential Lévy models by numerically solving the fundamental pricing PIDE. Our RBF scheme can handle arbitrary singularities of the Lévy measure in 0 without introducing further approximations, making it simpler to implement than competing methods. In numerical experiments using processes from the CGMY-KoBoL class, the scheme is found to be second order convergent in the number of interpolation points, including for processes of unbounded variation.
doi:10.1080/1350486x.2013.850902 fatcat:qde6tyi3pngpnmqgea6kwq6m74